The following discussion and analysis of the financial condition and results of
operations of Sollensys Corp (the "Company" or "Sollensys") should be read in
conjunction with our consolidated financial statements and the accompanying
notes thereto included elsewhere in this Annual Report on Form 10-K. References
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations to "us," "we," "our," and similar terms refer to the Company. This
Annual Report on Form 10-K includes forward-looking statements, as that term is
defined in the federal securities laws, based upon current expectations that
involve risks and uncertainties, such as plans, objectives, expectations and
intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors. Words such as "anticipate," "estimate," "plan," "continuing,"
"ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and
similar expressions are used to identify forward-looking statements. We caution
you that these statements are not guarantees of future performance or events and
are subject to a number of uncertainties, risks and other influences, many of
which are beyond our control, which may influence the accuracy of the statements
and the projections upon which the statements are based. Reference is made to
"Risk Factors," which are included elsewhere in this Annual Report on Form 10-K.
Overview
Business Overview
Our primary product is the Blockchain Archive Server-a turn-key, off-the-shelf,
blockchain solution that works with virtually any hardware and software
combinations currently used in commerce, without the need to replace or
eliminate any part of the client's data security that is being utilized. The
Blockchain Archive Server encrypts, fragments, and distributes data across
thousands of secure nodes every day, which makes it virtually impossible for
hackers to compromise. Using blockchain technology, the Blockchain Archive
Server maintains a redundant, secure, and immutable backup of data. Redundant
backups and the blockchain work together to assure not only the physical
security of the database but also the integrity of the information held within.
Blockchain Archive Server protects client data from "ransomware"-malicious
software that infects your computer and displays messages demanding a fee to be
paid in order for your system to work again. Blockchain technology is a
leading-edge tool for data security, providing an added layer of security
against data loss due to all types of software specifically designed to disrupt,
damage, or gain unauthorized access to a computer system (i.e., malware).
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Uniquely, the Blockchain Archive Server is a turn-key solution that can stand
alone or seamlessly integrate into an existing data infrastructure to quickly
recover from a cyber-attack. The Blockchain Archive Server is a server that
comes pre-loaded with the blockchain-powered cybersecurity software, which can
be delivered, installed, and integrated into a client's computer systems with
ease.
In December 2020, we made our second product offering-the Regional Service
Center-available on a limited test market basis. The Regional Service Center was
added to our standard product line effective January 1, 2021. A Regional Service
Center is a single unit system of 32 Blockchain Archive Servers capable of
servicing up to 2,580 individual small accounts, and is marketed to existing IT
service providers with established accounts. The Regional Service Center offers
small businesses the same state of the art technology previously available only
to large or very well-funded companies. Sollensys believes that smaller
companies, and even certain individuals, will find the Regional Service Center
affordable, paying only for the actual space they use.
Recent Developments
Rescission Agreement
As previously disclosed, pursuant to the Amended and Restated Merger Agreement
dated as of April 7, 2022 (the "Merger Agreement"), by and among S-CC Merger
Sub, Inc. ("S-CC Merger Sub"), a previously a wholly owned subsidiary of
Sollensys Corp ("Sollensys"); Ssolutions Merger Sub, Inc., a previously a wholly
owned subsidiary of Sollensys ("S-Solutions Merger Sub"); SCARE Holdings, LLC, a
wholly owned subsidiary of Sollensys ("SCARE"); (iii) Celerit Corporation, a
wholly owned subsidiary of Sollensys ("Celerit"); (iv) Celerit Solutions
Corporation, a wholly owned subsidiary of Sollensys ("Celerit Solutions"); (v)
Terry Rothwell; and (vi) CRE Holdings, LLC ("CRE"), the parties to the Merger
Agreement undertook certain transactions, including the merger of Celerit with
and into S-CC Merger Sub, with Celerit surviving, and the merger of Celerit
Solutions with and into S-Solutions Merger Sub, with Celerit Solutions
surviving, in which transactions Ms. Rothwell received certain consideration as
set forth in the Merger Agreement, and in connection with which the parties
entered into certain other agreements and certain other transactions. Subsequent
to entry into the Merger Agreement, the parties determined that they would
unwind the transactions as set forth in the Merger Agreement and in the other
agreements entered into in connection therewith.
Accordingly, on August 22, 2022, the Company entered into the Rescission,
Termination and Release Agreement (the "Rescission Agreement") by and among (i)
the Company, (ii) SCARE; (iii) Celerit; (iv) Celerit Solutions; (v) Ms.
Rothwell; (vi) Ron Harmon; and (vii) CRE. Pursuant to the terms of the
Rescission Agreement, the parties agreed to unwind the transactions as set forth
in the Merger Agreement and in the other agreements entered into in connection
therewith, so as to place each of the parties to the Merger Agreement in the
position that they were as of immediately prior to the closing of the
transactions as set forth in and as contemplated by the Merger Agreement and the
related agreements. As a result, on August 26, 2022, the following agreements
were terminated, except as set forth in the Rescission Agreement: (i) the
Rothwell Employment Agreement, (ii) the Harmon Employment Agreement, (iii) the
Blockchain Archive Server Agreement, (iv) the Rothwell Note, (v) the Banking
Agreement, and (vi) the Real Estate Purchase Agreement.
Pursuant to the terms of the Rescission Agreement, among other things, the
parties agreed as follows:
(viii) Sollensys agreed to transfer to Ms. Rothwell one share of Celerit common
stock;
(ix) Sollensys agreed to transfer to Ms. Rothwell one share of Celerit Solutions
common stock;
(x) Ms. Rothwell agreed to transfer to Sollensys 4,000,000 shares of Sollensys
common stock;
(xi) Ms. Rothwell agreed to resign from any and all positions with Sollensys,
including as a member of Sollensys' board of directors;
(xii) Donald Beavers agreed to resign as a director and officer of Celerit and
Celerit Solutions;
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(xiii) Anthony Nolte agreed to resign as a director and officer of Celerit and
Celerit Solutions; and
(xiv) Sollensys agreed, in connection with its withdrawal from Celerit of an
aggregate of $605,000 following the closing of the Merger Agreement, to
issue to Celerit a promissory note in the principal amount of $605,000,
accruing interest at the rate of 7% per annum and due on September 30,
2022 (the "Celerit Note"). As of the date of this Report, this Note
remains unpaid and in default. Celerit has initiated a collection action
on this Note.
In addition, pursuant to the terms of the Rescission Agreement, the parties
agreed to terminate:
(vii) The Executive Employment Agreement, dated as of April 7, 2022, by and
between Sollensys and Ms. Rothwell (the "Rothwell Employment Agreement"),
except as set forth in the Rescission Agreement;
(viii) The Executive Employment Agreement, dated as of April 7, 2022, by and
between Sollensys and Mr. Harmon (the "Harmon Employment Agreement"),
except as set forth in the Rescission Agreement;
(ix) The Rothwell Sollensys Blockchain Archive Server Distributive Data Center
Agreement (2 Units), dated as of April 7, 2022, by and among Sollensys, Ms.
Rothwell and George Benjamin Rothwell (the "Blockchain Archive Server
Agreement");
(x) The Promissory Note issued by Sollensys to Ms. Rothwell on April 7, 2022 (the
"Rothwell Note");
(xi) The Banking and Credit Union Services Agreement, dated as of April 7, 2022,
by and between Sollensys and Celerit (the "Banking Agreement");
(xii) The Real Estate Purchase Agreement, dated as of March 24, 2022, by and
among Sollensys, SCARE, CRE, Ms. Rothwell and Mr. Rothwell (the "Real
Estate Purchase Agreement").
Promissory Note
On August 22, 2022, Sollensys issued a Promissory Note, in the principal amount
of $605,000, to Celerit. The Celerit Note bears simple interest at a rate of 7%
per annum to the maturity date, September 30, 2022, or such earlier date as the
Celerit Note may be paid pursuant to the terms of the Celerit Note. There is no
penalty or premium for prepayment. In the Event of Default (as defined in the
Celerit Note), Celerit may, at its option, declare the entire indebtedness under
the Celerit Note immediately due and payable. As of the date of this Report,
this Note remains unpaid and in default. Celerit has initiated a collection
action on this Note.
Board Resignations
Pursuant to the terms of the Rescission Agreement, effective August 22, 2022,
Ms. Rothwell resigned as a member of Sollensys' board of directors. Effective
August 23, 2022, Anthony Nolte resigned as a member of Sollensys' board of
directors. Ms. Rothwell's and Mr. Nolte's resignations are not because of a
disagreement with Sollensys on any matter relating to Sollensys' operations,
policies or practices.
Abstract Media
We acquired Abstract Media, LLC ("Abstract Media") in December 2021. Abstract
Media was formed in October 2011 with the goal of improving user engagement
using visualization tools, and has evolved into an interactive media and
software development company to optimize effective corporate learning,
operational workflow and communication using technology in the augmented reality
or virtual reality space. Abstract Media conducts its operations from its office
location in Houston, Texas.
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On November 4, 2022, the Company sold 100% of its membership interest in
Abstract Media, LLC to Tech Edge Services for $1,000. Additional terms are as
follows:
(a) The Parties acknowledge and agree that Abstract Media is currently the lessee
pursuant to a lease for the premises located at 33136 Magnolia Circle, Suite
F, Magnolia, Texas 77354 (the "Lease"). Following the Closing, the Seller
shall continue to pay the rent payable pursuant to the Lease for the months
of November 2022 and December 2022. Buyer shall thereafter be responsible for
rent payments in the Lease commencing on January 1, 2023.
(b) The Company shall pay, and shall be responsible for, all outstanding
liabilities of Abstract Media related to any and all contracts of Abstract
Media as of the Closing Date.
(c) Following the Closing and for a period of 24 months thereafter (the "Earn-Out
Period"), Buyer shall pay to the Company an amount equal to 5% of the gross
proceeds received by the Company with respect to contracts and agreements in
place with Abstract Media as of the Closing Date. Such payments shall be made
within 7 days of each calendar month during the Earn-Out Period.
As a result of the sale, Abstract Media became a discontinued operation and the
Company recorded a loss from discontinued operations amounting to $606,383 for
the year ended December 31, 2022.
Sale of Headquarters Property
On November 3, 2022, the Company entered into a Commercial Contract (the "Sale
Agreement"), by and between the Company and EML Realty Partners, LLC ("EML"),
pursuant to which the Company agreed to sell, and EML agreed to purchase, upon
the terms and conditions set forth in the Sale Agreement, the Company's
headquarters property at 1470 Treeland Boulevard SE, Palm Bay, Florida (the
"Property"). Pursuant to the terms of the Sale Agreement, EML agreed to pay to
the Company $3,850,000 in exchange for the Property. The Sale Agreement was
subject to a 30-day due diligence period and contained customary
representations, warranties, and conditions.
The sale of the Property closed on December 30, 2022.
In connection with the sale of the Property, the parties also agreed to enter
into a five-year office lease ("Lease") after closing, pursuant to which EML
agreed to lease to the Company the office building on the Property. In exchange,
the Company agreed to pay to EML base rent as follows:
Months Annual Base Rent Monthly Base Rent
1-12 $ 308,000.00 $ 25,666.67
13-24 $ 317,240.00 $ 26,436.67
25-36 $ 326,757.20 $ 27,229.77
37-48 $ 336,559.92 $ 28,046.66
49-60 $ 346,656.72 $ 28,888.06
The Company and EML entered into the Lease on December 30, 2022. In connection
with entry into the Lease, and pursuant to the terms thereof, the Company
delivered to EML a personal guaranty by Donald Beavers, the Company's Chief
Executive Officer and a member of the Company's Board of Directors.
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Results of Operations for the Twelve Months Ended December 31, 2022 Compared to
the Twelve Months Ended December 31, 2021
See "-Overview-Recent Developments" regarding the unwinding of all of the
Celerit transactions and the sale of Abstract Media. The results from
discontinued operations are excluded from management's discussion of operation
below, and from the Liquidity analysis.
Revenue
For the year ended December 31, 2022, we recorded $344,467 in revenue compared
to $181,071 in revenue for the year ended December 31, 2021. The increase is
attributable to the execution of our blockchain archive server agreements. We
are in the process of developing our strategic business plan going forward and,
therefore, revenue may vary from period to period.
Cost of sales
Cost of sales was $857,911 for the year ended December 31, 2022, compared to
cost of sales of $339,430 for the year ended December 31, 2021. The significant
increase in cost of sales is attributable to higher sales, and the buildout of
our infrastructure in in anticipation of higher sales levels in 2022.
Operating expenses
Operating expenses for the year ended December 31, 2022 were $4,150,541 compared
to $4,233,858 for the year ended December 31, 2021. The decrease in operating
expenses in the year ended December 31, 2022, compared to the same period in
2021 is due to the buildout of the infrastructure at the Company in 2021 to
support higher levels of activity and revenue generation in 2022 that didn't
materialize. Prospectively the Company is attempting to continue to reduce its
level of operating expenses because its anticipated revenue ramp-up has not
occurred. There can be no assurance that the Company can reduce expenses and
that the levels of revenue will increase in the future.
Key components of the Company's operating expenses for the year ended December
31, 2022 include approximately $1,287,000 in legal and professional fees,
approximately $2,677,000 in payroll and benefits (which includes $610,000 in non
cash, stock -based compensation), and approximately $194,000 in rent expense.
Liquidity and Capital Resources
We had $799,496 in cash and cash equivalents on hand as of December 31, 2022.
The analysis below of the Company's liquidity excludes any discussion of the
impact on cash flows from discontinued operations.
Net cash used in operating activities for continuing operations was $3,592,516
for the year ended December 31, 2022, compared to $3,710,457 in cash used for
continuing operations for the year ended December 31, 2021. The slight decrease
in cash used in operating activities during the period ended December 31, 2022
was primarily due to a decrease in the operating loss in the December 31, 2022
year compared to the same period ended December 31, 2021.
Net cash provided by investing activities from continuing operations during the
year ended December 31, 2022 was $3,615,804 compared to $413,533 cash used in
investing activities from continuing operations for the year ended December 31,
2021. The increase in cash provided by investing activities during the period
ended December 31, 2022 was primarily due to the net proceeds of $3,626,330 from
the sale of the Company's headquarters in 2022, and a decrease of $403,007 in
capital expenditure during the 2022 period compared to 2021.
30
Net cash provided by investing activities from continuing operations was
$698,532 for the year ended December 31, 2022, compared to $4,602,399 for the
year ended December 31, 2021. The decrease in cash provided by investing
activities during the 2022 period compared to 2021 was primarily due to proceeds
from notes payable and related party loans of $2,773,175 in the 2022 period
compared to $-0- in the 2021 period, payments on notes payable of $2,504,934 in
the 2022 period compared to $-0- in 2021 period; offset by $4,603,399 in
proceeds from the sale of common stock in the 2021 period compared to $530,001
in the 2022 period .
Since we have been incurring losses from operations, we have relied on ongoing
sales of unregistered securities, short term promissory notes from third parties
and related parties, the personal guarantees of Mr. Beavers, our Chief Executive
Officer.
There can be no assurance that we will be able to continue to raise capital from
the sale of our securities, or use our securities to make acquisitions.
Additionally, there can be no assurances that Mr. Beavers will continue to
provide his personal guaranty on financing transactions to help raise capital.
Financial Impact of COVID-19
The COVID-19 pandemic has affected how we are operating our business, and the
duration and extent to which this will impact our future results of operations
and overall financial performance remains uncertain. The COVID-19 pandemic is
having widespread, rapidly evolving, and unpredictable impacts on global
society, economies, financial markets, and business practices. Federal, state
and foreign governments have implemented measures to contain the virus,
including social distancing, travel restrictions, border closures, limitations
on public gatherings, work from home, and closure of non-essential businesses.
To protect the health and well-being of our employees, partners, and third-party
service providers, we have implemented work-from-home requirements, made
substantial modifications to employee travel policies, and cancelled or shifted
marketing and other corporate events to virtual-only formats for the foreseeable
future. While we continue to monitor the situation and may adjust our current
policies as more information and public health guidance become available, such
precautionary measures could negatively affect our customer success efforts,
sales and marketing efforts, delay and lengthen our sales cycles, or create
operational or other challenges, any of which could harm our business and
results of operations. In addition, the COVID-19 pandemic has disrupted the
operations of our current enterprise customers, as well as many potential
enterprise customers, and may continue to disrupt their operations, for an
indefinite period of time, including as a result of travel restrictions and/or
business shutdowns, uncertainty in the financial markets, or other harm to their
businesses and financial results, resulting in delayed purchasing decisions,
extended payment terms, and postponed or cancelled projects, all of which could
negatively impact our business and results of operations, including our revenue
and cash flows.
Beginning in March 2020, the U.S. and global economies have reacted negatively
in response to worldwide concerns due to the economic impacts of
the COVID-19 pandemic. These factors also may adversely impact enterprise and
government spending on technology as well as such customers' ability to pay for
our products and services on an ongoing basis. For example, some businesses in
industries particularly impacted by the COVID-19 pandemic, such as travel,
hospitality, retail, and oil and gas, have significantly cut or eliminated
capital expenditures. A prolonged economic downturn could adversely affect
technology spending, demand for our offerings, which could have a negative
impact on our financial condition, results of operations and cash flows. Any
resulting instability in the financial markets could also adversely affect the
value of our common stock, our ability to refinance our indebtedness, and our
access to capital.
The ultimate duration and extent of the impact from the COVID-19 pandemic
depends on future developments that cannot be accurately forecasted at this
time, such as the severity and transmission rate of the disease, the actions of
governments, businesses and individuals in response to the pandemic, the extent
and effectiveness of containment actions, the impact on economic activity and
the impact of these and other factors on our employees, partners, and
third-party service providers. These uncertainties may increase variability in
our future results of operations and adversely impact our ability to accurately
forecast changes in our business performance and financial condition in future
periods. If we are not able to respond to and manage the impact of such events
effectively or if global economic conditions do not improve, or deteriorate
further, our business, financial condition, results of operations, and cash
flows could be adversely affected.
31
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
We believe that the following critical policies affect our more significant
judgments and estimates used in preparation of our consolidated financial
statements.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business
for the twelve months following the date of these consolidated financial
statements.
The Company expects to generate operating cash flow that will be sufficient to
fund presently anticipated operations although there can be no assurance. This
raises substantial doubt about the Company's ability to continue as a going
concern. Therefore, the Company will need to raise additional funds and is
currently exploring alternative sources of financing to supplement expected cash
flow. Historically, the Company has raised capital through private placements,
as an interim measure to finance working capital needs and may continue to raise
additional capital through the sale of common stock or other securities and
obtaining some short-term loans. The Company will be required to continue to do
so until its operations become profitable.
The Company may attempt to raise capital in the near future through the sale of
equity or debt financing; however, there can be assurances the Company will be
successful in doing so. There can be no assurance that such additional financing
will be available to the Company on acceptable terms or at all.
Revenue Recognition
Revenues are accounted for in accordance with the FASB's Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606).
32
The Company derives revenue from two sources. The Company's primary product is
the Blockchain Archive Server-a turn-key, off-the-shelf, blockchain solution
that works with virtually any hardware and software combinations currently used
in commerce, without the need to replace or eliminate any part of the client's
data security that is being utilized.
The second product offering is called the "Regional Service Center" which is a
single unit system of 32 Blockchain Archive Servers capable of servicing up to
2,580 individual small accounts, and is marketed to existing IT service
providers with established accounts. The service is delivered over the Internet
and is considered software as a service "SaaS".
The amount of revenue recognized reflects the consideration which the Company
expects to be entitled to receive in exchange for the products and/or services.
To achieve this principle, the Company applies the following five steps:
1. Identify the contract with the customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to performance obligations in the contract,
and
5. Recognize revenue when or as the Company satisfies a performance obligation.
The Company recognizes revenue when the control of the Blockchain Archive Server
is transferred to the Company's customer, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for these
products. Control is generally transferred when products are delivered. The
Company's revenue contracts generally represent a single performance obligation
to sell its products to customers. For the SaaS software, which typically
involves a significant customer deposit with services provided by the Company
over a 60 month period, the Company recognizes revenue ratably as service is
provided over the contract period.
Goodwill and Intangible Assets
Goodwill represents the future economic benefit arising from other assets
acquired that could not be individually identified and separately recognized.
The goodwill arising from the Company's acquisition is attributable to the value
of the potential expanded market opportunity with new customers. Intangible
assets have either an identifiable or indefinite useful life. Intangible assets
with identifiable useful lives are amortized on a straight-line basis over their
economic or legal life, whichever is shorter. The Company's amortizable
intangible assets consist primarily of customer relationships. The useful life
of these customer relationships is estimated to be three years.
Goodwill is not amortized, but is subject to annual impairment testing unless
circumstances dictate more frequent assessments. The Company performs an annual
impairment assessment for goodwill during the fourth quarter of each year and
more frequently whenever events or changes in circumstances indicate that the
fair value of the asset may be less than the carrying amount. Goodwill
impairment testing compares the fair value of the reporting unit to its carrying
amount. The fair value of the reporting unit is determined by considering both
the income approach and market approaches. The fair values calculated under the
income approach and market approaches are weighted based on circumstances
surrounding the reporting unit. Under the income approach, the Company
determines fair value based on estimated future cash flows of the reporting
unit, which are discounted to the present value using discount factors that
consider the timing and risk of cash flows. For the discount rate, the Company
relies on the capital asset pricing model approach, which includes an assessment
of the risk-free interest rate, the rate of return from publicly traded stocks,
the Company's risk relative to the overall market, the Company's size and
industry and other Company specific risks. Other significant assumptions used in
the income approach include the terminal value, growth rates, future capital
expenditures and changes in future working capital requirements. The market
approaches use key multiples from guideline businesses that are comparable and
are traded on a public market. If the fair value of the reporting unit is
greater than its carrying amount, there is no impairment. If the reporting
unit's carrying amount exceeds its fair value, then an impairment loss is
recognized in an amount equal to the excess.
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Recently Adopted Pronouncements
The Company currently follows the guidance in ASC 840 "Leases," which requires
us to evaluate the lease agreements the Company enters into to determine whether
they represent operating or capital leases at the inception of the lease.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which
establishes a new lease accounting model for lessees. The updated guidance
requires an entity to recognize assets and liabilities arising from financing
and operating leases, along with additional qualitative and quantitative
disclosures. The amended guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early
adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification
Improvements, which clarifies certain aspects of the new lease standard. The
FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July
2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted
Improvements, which provides an optional transition method whereby the new lease
standard is applied at the adoption date and recognized as an adjustment to
retained earnings. The amendments have the same effective date and transition
requirements as the new lease standard. On November 15, 2019, the FASB issued
ASU 2019-10, which amends the effective dates for three major accounting
standards. The ASU defers the effective dates for the credit losses,
derivatives, and lease standards for certain companies.
In the first quarter of fiscal 2022, the Company adopted ASU 2016-02 using the
"Comparatives Under 840 Option" approach to transition. Under this method,
financial information related to periods prior to adoption will be as originally
reported under the previous standard - ASC 840, Leases. The effects of adopting
the new standard (ASC 842, Leases) in fiscal 2022 were recognized as a
cumulative-effect adjustment to accumulated deficit as of the beginning of the
fiscal first quarter. We elected the package of practical expedients permitted
under the transition guidance within the new standard, which among other things,
allows us to carry forward the historical lease classification as operating or
capital leases. We also elected to combine lease and non-lease components and to
exclude short-term leases from our consolidated balance sheets.
The most significant impact of adoption was the recognition of right-of-use
operating lease assets and right-of-use operating lease liabilities of $496,000
and $541,000, respectively. The cumulative impact of these changes increased the
accumulated deficit by approximately $46,000. We expect the impact of adoption
to be immaterial to our consolidated statements of operations and consolidated
statements of cash flows on an ongoing basis. As part of our adoption, we also
modified our control procedures and processes, none of which materially affected
our internal control over financial reporting. See Note 9 Leases, for additional
information regarding our accounting policy for leases and additional
disclosures.
Except for the adoption of ASC 842, management does not believe that any
recently issued, but not yet effective, accounting standards could have a
material effect on the accompanying financial statements. As new accounting
pronouncements are issued, we will adopt those that are applicable under the
circumstances.
Recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants and the SEC did not have, or are not believed by
management to have, a material effect on the Company's financial statements.
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